Only last December, China Telecom gave its rather pedestrian earnings growth a rocket boost with an 80 billion yuan acquisition of six provincial assets, more than doubling its subscribers. A flurry of earnings upgrades followed and the share price did not disappoint, reaching a new high of $3.45.
Now the fixed-line carrier reveals it is considering taking the remaining 11 provincial networks off its parent's hands. Will the same virtuous recipe be repeated, or is this a less palatable offering?
It would seem a surprise if those left for last were not the less attractive assets. Once again pricing is less of a concern, as the usual pattern of the parent selling the target provinces at a discount to price-earnings ratio should be repeated.
It is assessing the future profitability that is more troublesome. For a fixed-line operator wiring up sparsely populated Inner Mongolia or Tibet is inevitably a harder task than in Shanghai or Shenzhen.
Also, bringing these more backward provincial assets up to working order presents a more onerous undertaking. Forecast capital expenditure of US$1.4 billion for these new provinces also means these assets are unlikely to be immediately cash-flow positive.
If all the assets are injected at once as speculated, the value of the transaction is expected to be in the region of US$7.7 billion, made up of a U$3.6 billion cash payment and US$4.1 billion in debt.
The biggest difference from last December is that this time equity investors will need to dig into their pockets, possibly to the tune of US$2 billion. Aside from the overhang on the share price, on a more fundamental basis, the resultant boost to earnings per share will necessarily be less because of dilution from new shares issued.